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The TelstraClear UFB Interview - Reinstating A NZ Telecomms Monopoly

TelstraClear CEO Dr Allan Freeth Talks Ultra Fast Broadband Part 2

Interview by Alastair Thompson
Filming and editing by Selwyn Manning

See also part 1 - TelstraClear UFB Interview - The UFB Network NZ Already Has

In recent weeks TelstraClear CEO Dr Allan Freeth has been at the sharp end of a united telecommunications industry campaign against legislation to enable Ultra Fast Broadband which is currently proceeding through Parliament.

Dr Freeth has said the planned government reforms will hand Telecom a monopoly in New Zealand telecommunications in a manner which will likely stifle investment and innovation for at least the next decade and lead to a third world telecommunications system.

At Dr Freeth's invitation Scoop's Alastair Thompson and Selwyn Manning interviewed the TelstraClear CEO in depth about his company's views on the future of telecommunications in New Zealand - and the role of TelstraClear in that future.

For additional background see:
- TelstraClear: Ultra Fast Broadband (UFB) Legislation and TelstraClear
- Technical background presentation on the TelstraClear HFC Cable network in Wellington and Christchurch (.pdf)
- TelstraClear Corporate Overview (.pdf)
- Video - TelstraClear Real World Traceroute - From Scoop Home To Scoop HQ

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In Part 2 of the extended interview with TelstraClear CEO Dr Freeth we continue the discussion about UFB starting with some observations about the trial of the 100mbs service recently completed by TelstraClear and then quickly moving to an extended discussion of the Government's UFB legislation.

In part 2a Dr Freeth comments on:
- The fact that demand for broadband speed is far from homogeneous - not everyone wants or can use 100mbs speed - and nor are the likely to want to pay for it.
- The complexities of getting houses connected to fast broadband - i.e. the need to not only upgrade the connection but also all the internal equipment in the house including the computers themselves.
- The security (and network stability) risks associated with fast broadband in homes.
- At 6 minutes into the video the discussion moves on to discuss the telecommunications industry alliance against the Government's broadband plans.
- Dr Freeth begins by explaining how the group came together after the Government tabled its legislation to implement its UFB plans.
- Dr Freeth says the primary catalyst for forming the group was the tabling of a Supplementary Order Paper related to structural separation of Telecom. TelstraClear then became the nucleus of an opposition movement around the Government's plans. Dr Freeth observes that the bill as drafted gives Chorus 2 (post Telecom separation) protection from regulation around competition issues for 10 years, as well as immunity from Commerce Commission action around acquisitions - a provision which appears to encourage Chorus 2 becoming a network monopoly.
- At around 11.00 minutes Dr Freeth moves into the detail of how TelstraClear views the details in the Governments UFB legislation.: Specifically:

a) Its concerns around announcement of the decision to not allow Telecommunications companies to participate in the build - after which TelstraClear believed its future would then be in providing retail services over the fibre network.
b) However when the terms and conditions of operating as a provider over the network were announced they were shocked at how the system would work. Dr Freeth says that under the proposals Telecom will have a lower threshold to abide by than it does now - "discrimination" rather than "equivalence" - in terms of what it offers its wholesale customers - and that effectively there will be no enforcement except via its joint venture partner Crown Fibre Holdings which will amount too a wet bus ticket. It was this provision in particular which gave rise to the coalition of opposition who agree that under the plans consumers can expect high prices, less choice and no referee to turn to.
c) (See also… TelstraClear's UFB Submissions to the Finance and Expenditure Select Committee)

- Dr Freeth then briefly outlines TelstraClear's views on potential compromises which would enable it to live with the government's plans.

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In part 2b Dr Freeth continues his discussion of the problems inherent in the UFB legislation:
- He begins by pointing out that a similar regulatory holiday proposal was ruled illegal in Germany;
- The discussion then turns to provisions in the legislation which will result in making ADSL and VDSL (the most common current form of broadband to homes) more expensive.
- This, Dr Freeth explains, is because the whole structure of the legislation is aimed at discriminating against existing networks to encourage high uptake of customers on the new fibre network - which is needed to make it economic for its builders and investors.
- He then gives three practical examples of how this will likely happen:
a) in Wellington where the network will be in competition with the TelstraClear HFC network; and
b) when UFB fibre will be competing against unbundled ADSL provided by the likes of TelstraClear and Orcon; and finally,
c) when Chorus 2 elects not to invest further in its own ADSL network instead offering customers a choice of just one kind of connection - fibre.
- Pricing indications which were recently made public via leaks are then discussed (see… NZ Herald and Internet NZ).
- The pricing wholesale is indicated at $40 per customer for TelstraClear and other retail providers - in practice this will likely means costs of actual connection of closer to $100 per month.
- Dr Freeth is also skeptical about uptake rate assumptions of 60% in the Crown Fibre Holdings plans. If these fall short then pricing is likely to be higher than expected and customers will possibly have no alternatives. "Gravity always works".
- Dr Freeth says that one of the fundamental flaws in the Government's plans is the assumption that fibre to the home is the only technology that should be employed. And that it should be employed everywhere. He points out that 4g wireless - which is already deployed in places- is capable of supplying speeds comparable to those being discussed under the UFB plan.
- In Dr Freeth's view the most likely driver of lower prices for UFB in the NZ market would be a market with multiple technologies competing - instead we are headed for the opposite.
- In addition to this he asks "where is the demand" and suggests that building infrastructure far ahead of the demand curve is costly for consumers and network providers alike.
- Finally in this part he discusses how this situation most likely came about in the negotiations with Telecom. Telecom had already built fibre to every node and was therefore in a very good negotiating position with the Government. Either they should be included in the build, or they would be in a very good position to compete against it by providing VDSL services over the entire country. This would make the fibre build uneconomic.
- Dr Freeth expresses some considerable sympathy with Telecom about how it has been treated in recent years, and comments that if Dr Paul Reynolds pulls off this deal and "reestablishes Telecom's monopoly with Government money and Government protection", then he will take off his hat off to him. "That's one hell of a deal, and I will be very impressed if he can do it"

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In part 2c concluding the 2nd part of the interview Dr Freeth comments on the implications of reinstating such a dominant position in the NZ telecommunications marketplace commenting that:
- This regulation will fragment and breakup the profit pool and stifle innovation in the NZ Market. TelstraClear and Vodafone and other players will move their capital out of the market.
- Dr Freeth explains that Telstra currently spends $100 million a year in capital investment in its network and that it will be hard to justify continuing to do this in the coming regulatory environment.
- He has told Minister Steven Joyce that the plans as they stand will lead to a third world telecommunications environment in NZ.
- He says there are likely unintended consequences in what the Government is doing. Using a Basil Fawlty analogy he says there is a fine line between renovation and destruction, and in this case the Government is bordering on destruction.

(Continuing….)
In Part 3 of the TelstraClear CEO Interview Dr Allan Freeth and Alastair Thompson will discuss what possible strategic responses TelstraClear will have to the coming UFB build.

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